The Death of the Dollar
Within this survey of the dollar, I will delve into the value of the dollar both past and present and the significance of its value. This delving will yield an understanding of what main factors influence the value of the dollar and thus the impact of that gain or loss of value on the common man. In attempting to discover these influences on the dollar, other fiat systems will be used as an example so as to better understand our own system and possible predicament. While no two situations will ever play out in the exact same manner, even a basic understanding of statistics and correlation will elucidate the importance of these examples. Moreover, once an adequate understanding of the dollar and its likely path have been discovered, I will then look at what is to be done about this course. While hind sight is 20/20, taking harmless preemptive action against a probable outcome surely can do no harm.
Let us first look at the purchasing power of the dollar since 1900 in order that we may understand what has happened in the past. Through this past we may possibly gleam some nugget of the future. As demonstrated by the chart on the right, the dollar has lost most of its purchasing power since 1900. The dollar of 2020 is worth 1/26, or 3.8%, of the dollar of 1900, and why is this? There are two main causes that I attribute to the devaluation of the dollar. the first of these reasons is the government. The government prints money in order to solve problems which increases money supply, thus devaluing the currency. The government also took the dollar off of the gold standard which was preventing the Federal Reserve, whom I will call the Fed or in some cases JPOW, from increasing fiscal stimulus to the degree they thought necessary. Secondly, there is the Fed who has two main tools at their disposal in terms of monetary policy. The first tool is to control interest rates, low rate = growth stimulation … high rate = economic contraction. The second tool the Fed has at their disposal is the issuance of treasury bonds. This allows the Fed to create Treasury Bonds and give them to the Treasury Department. The Treasury Department then gives the bonds to the banks who in turn sell them back to the Federal reserve thus creating money and fiscal stimulus. When understanding these two main factors it is very easy to see how the dollar of our forefathers was much stronger than the dollar we have today. One must also ask themselves, with rampant money printing and an enormous national debt, should one really expect an increase in the value of the dollar or continued devaluation through inflation?
Let us now entertain that the value of the dollar, and thus the wealth of Americans, were to increase. How could this happen and what would be the catalyst of such a return in strength to the dollar? there are two scenarios that most directly apply to the current situation. Scenario A is that the dollar strengthens and inflation recedes. In order for the dollar to strengthen at this point in time, the Fed would have to meaningfully raise rates. The Fed would also have to cease all fiscal stimulus through its treasury issuance and buybacks in order to give strength to the dollar. If the Fed were to follow this course of action, there would be a decrease in the money supply, restoring some value to the dollar. The Fed has stated that it will cease its treasury issuance over the coming months, and while this is necessary for the beginnings of a strong economy, it is not enough. The other “tool” the Fed has is to raise or lower rates. The Fed recently stated that it plans on three rate hikes in 2022. with these three rate hikes, the interest rate should be somewhere around 0.9% going into 2022. Typically, the stock market doesn’t like news of rate hikes, but during the most recent FOMC announcement, the stock market surged. This recent surge is Wallstreet laughing at the Federal Reserve as they realize that this will have no meaningful effect on inflation. These rate hikes will have no real effect on inflation because inflation is currently, as of November 2021, sitting at 6.9%. With the Federal Fund Rate sitting at .25% the real rates that are experienced on loans are -6.65% what this essentially means is that money is free to borrow, thus leading to the surge in both the stock market and the housing sector since March 2020.
Scenario B is my personal favorite as it would be akin to ripping off the band aid. In Scenario B, JPOW would have to raise rates past the rate of inflation in order to slow and kill inflation. In the 80’s, the CPI surged to 14%. The response of the Fed at the time was to raise rates to 20%. This indeed worked and within three year the CPI measure was back down to 3.5%. Now that it is clear that this has worked in the past, why can’t the Fed just jack interest rates up in order to quell inflation? The difference is debt. If the Fed were to raise rates to the point where they would have an impact on inflation, everyone would default on debt. The amount of debt in our system is so large that the government has to increase the debt ceiling to pay off other debt and so on. If the rates went up in any meaningful way, the stock market as well as most asset classes would absolutely disintegrate making the previous crashes of this century look like a cakewalk. Not only is debt in our financial system at all-time highs, but margin borrowing has skyrocketed. These two factors alone would be enough to cause absolute chaos in the system of rates were to increase. So now that we understand that the Fed can’t raise rates because this would cause an unimaginable issue for literally everyone, what seems to be the most logical course of action for the Fed and the government?
Though the solution that I believe the Fed has chosen may seem simple or naïve, think about why this is the best course of action. The Fed, in my view, can do nothing and therefore will do nothing. They will feign concern and pitifully act as if they were actually fighting inflation hard. But ultimately there will arise more and more excuses about why they must continue quantitative easing through low rates and the creation of money. Reasons such as Omicron, or as Greg Mannarino calls it, “Moronic”, unemployment and government spending will conveniently pop up. The Fed is not solely to blame as our governing bodies are terrible at managing spending and great at spending what they do not have. The outcome of the Fed’s actions will indeed be an increase in inflation through greater money supply primarily. This is their endgame. In high inflation, government debts erode away and while the poor become poorer, the rich become increasingly wealthy. Ultimately, the Fed is between a rock and a hard place and has two choices. One, crash the economy in one fell swoop and be known as public enemy number one. Or two, crash the economy invisibly by destroying the dollar through inflation. Which do you think they will choose?
Having gained an understanding as to the main reason our dollar has declined 96.2% since 1900, what will its value be in the future? Inflation through monetary policy is not going away anytime soon as shown through our past, but let us look to the past of another country that experienced high inflation. Through this we may glean a nugget as to where we’re headed and what is to be done about it. It is also important to note that no fiat currency has survived the test of time. In fact, 20% of all fiat money systems have failed through hyperinflation. While this example below of what happens to a currency during high inflation, its similarities are striking to the current conditions in America. Rising prices, low productivity and the use of money
printing to solve the issues of the day occurred in Hungary and are happening now in America. In Hungary, real wages fell by 80% or more and savings accounts were utterly decimated. Please either read this article in full attain an understanding of what happens to the purchasing power of average citizens during this event.
It is difficult to fathom that such an event could take place here in America, but that is what makes it all the more likely and devastating. False presumptions of security often lead to lackadaisical policy and oversights that leave systems vulnerable. It is for precisely this reason that we must look at the logical likelihood of this event. When looking at all of the economic data that is available today the state of our economy is not as rosy as MSNBC would have you believe. This data also points to the fact that we are already experiencing a high inflation environment and that most have not realized this yet. And while there is a massive amount of data that is pertinent, I shall summarize the most important of this data.
- Debt as a Percentage of GDP is now 125%. Our production capabilities are severely lacking.
- Initial unemployment claims keep exceeding economist expectations.
- Record amounts of job openings indicate either a lack of willingness to
work or salary shopping in a competitive hiring market.
- Supply chain issues are also driving prices higher.
- Home sales are down even with real rates being negative
- Credit debt is through the roof
- The CPI came in at 6.9%
Now that we have established that it is not out of the question that we may experience some similar inflationary event, I would like to look at the CPI. This is the official measure of inflation that is presented to us by the US Bureau of Labor and Statistics. While a reading of 6.9% shocked many, I would like argue that this number is egregiously false and in fact acts as a cover for the true nature of what is unfolding in the system. How is this number calculated, and has this formula changed? This number is calculated through an aggregate of average prices across the main consumer products and their increase or decrease as a collective compared to prior readings. The Formula for the CPI has been
changed twice and, in both cases, certain consumer necessities were removed from the equation such as housing costs. Shadowstats, a website that provides us with a CPI reading of 15% based on the older
calculations, states the benefit that the change in the formula yields,
In general terms, methodological shifts in government reporting have depressed
reported inflation, moving the concept of the CPI away from being a measure of the
cost of living needed to maintain a constant standard of living.
So if the measure of inflation has been tampered with to hide the true inflation, then isn’t this issue already much worse than the Fed and government want us to believe? Most certainly, and with the Fed not able to raise rates, it does certainly appear as if we might be on the cusp of high inflation or even hyperinflation. This is especially so given the fact that quantitative easing will most certainly continue.
So the inflation rate is high, but what gives? the very last kicker is this little thing called the velocity of money. The following paragraph succinctly describes this phenomenon and was pulled from an article regarding hyperinflation and money velocity.
“At the beginning of every hyperinflation, it looks like everything is okay. The economy is emerging from a crisis, usually a deflation or some kind of recession, and things are getting better. People feel more prosperous because the storm has passed and there’s more money around from the extra currency the government has printed. Markets like housing and stocks tend to rise. But this is an illusion because prices have yet to adjust for all the extra currency that was created. Why does it have to adjust? Because inflation is not just the result of a spike in money supply, but also money velocity. In simple terms, this is a measure of how frequently currency changes hands. As citizens begin to feel better about the state of the economy, they spend more. That extra money now starts to enter the economy and prices begin to move higher as it circulates more and more. Even though central bankers can control the money supply, they can’t control velocity. And since money velocity is largely a psychological phenomenon, it’s very hard to change it back once it takes hold. This is how inflation has historically gotten out of control and led to hyperinflation.”
The velocity of money in the system has yet to spike, but as this article mentions, this spike will only really come at a point when the general public realizes what is happening. Then there will be a move out of the dollar, which is losing value, and a move into hard assets such as tools, non-perishable food and any real thing whose value is not predicated on the dollar, but on supply and demand.
So, what can we do to protect our families and preserve our wealth through such an event? Looking at a hyperinflation case, the Weimar Republic, there is one asset that clearly was successful at wealth preservation. While this may seem cliché, that asset was gold. According to the IMF, gold is “the only asset which runs no counter-party risk.” We may also include silver into this example because both act in the same way with regard to inflation, but have different uses. An article from GoldSilver.com succinctly states the role of gold and silver in such a hyper-inflationary event,
In the Weimar Republic during hyperinflation, gold did what it’s supposed to do: its
value skyrocketed during hyperinflation. Over the five-year period that included
hyperinflation, the gold price increased 1.8 times faster than the inflation rate. In
other words, not only did someone holding gold survive during the Weimar
hyperinflation, their purchasing power actually increased by nearly double. Contrast
that with the fact that most people’s savings were completely wiped out. Even the
wealthiest citizens were turned into poor ones literally overnight, except for those
that owned gold and silver.
This example also holds true in all other inflation and hyperinflation cases. So, it appears as though one should own both gold and silver in the case of currency devaluation. Since the dollar has been losing value consistently over the past 120 years, why should now be any different?
Beyond the fact that gold and silver become intensely useful during inflation for their ability to preserve wealth, they also hold their value even in what we perceive as ‘normal’ times. To demonstrate this, I will now present historical value and thus purchasing power of both the dollar and gold. In 1900, a loaf of bread cost $0.04 USD. In 2021, a loaf of bread costs an average of $3.3. With one dollar in 1900 you could have bought 25 loaves of bread. The price of gold in 1900 was $20.67. In order to equate the dollar to gold we will equate the dollar amount to the gold price for an accurate comparison. With 1 oz of gold you could have bought about 516 loaves of bread and with $20.67 USD you could’ve bought about 516 loaves of bread. Today the price of 1 oz of gold is around $1800 USD. Thus, an oz of gold could buy about 545 loaves of bread today. That same $20.67 USD, would buy you a meager 6 loaves of bread. This also holds true for almost everything that one could buy. A fully tailored men’s suit cost about $20 in 1900. today that won’t even buy a tie whereas an oz of gold could buy a tailored suit. So, it becomes clear that gold not only held, but did in fact gain value in the past 120 years while the dollar lost almost all its value. It is important also to run inflation adjusted returns on the stock market because the real returns are far less than the thousands of percent the charts show.
If either of the aforementioned scenarios do in fact play out, which one inevitably will, then gold’s primary function should be thought of as a wealth vessel until such a time that a new system arose which gained the public trust. Silver in this circumstance could also play the role of the vessel, but would almost certainly be more useful in the day to day needs since silver’s intrinsic value is less. If the hyperinflation came to pass, then there would also be ample opportunity to grow one’s wealth too. This could be in the form of real estate for example. Many people would default on their mortgages and there would be many incredible deals. These deals won’t be able to be taken advantage of in the increasingly worthless fiat currency, but if one had gold or silver, a seller would be willing to sell for something that has real value. On a side note about mortgages and adjustable rate debt. In hyperinflation, ordinary debt such as a car or house loan, interest rates on any debt are not locked in. A clear example of this happened in Mexico when during their hyperinflation, mortgage rates changed daily. Even those who had locked in an interest rate for 5-10 years were not safe as the government and banks just changed the rules. So, moving forward, one should be as careful as possible about how much debt they take on. It would be wise to avoid taking on more debt than one could currently pay off with their available cash.
Now, understanding that gold and silver hold and even gain value over time, and that these metals perform well in any scenario, one must understand two important things. First, the quality or type of metal to acquire. When looking at the quality or type of metal to acquire, there are two main factors: liquidity and purity. Basically, any bullion that one buys should be well recognizable and have an appropriate size for its use. For example, 1 oz silver coins could be used to buy food or basics necessities, whereas 100 oz silver bars could be used to buy farm implement, land or larger items. In the case of hyperinflation, gold should most likely not be used, but held until such a time that a new currency or currency stabilization is seen by the general public. Quantity is tough to land upon as everyone has different available means, but a goal might be able to live solely on gold or silver for two or three years while supporting one’s standard of living. Then there could be other set aside for wealth preservation. As a percentage of one’s wealth, it should not be overwhelming, but enough to give the needed security and ability to pounce on opportunity. If one’s means do not currently afford the ability to reallocate a portion of the assets into metals, a slow approach makes the most sense. This slow approach will allow one to grow their security slowly through setting aside a reasonable amount of each paycheck for the acquisition of physical bullion. It should be noted that any bullion purchased should always have the troy weight as well as the purity stamped upon it. Without these, your bullion will be useless or difficult to use. It should also be noted that certain mints will be widely recognized such as the RCM and Perth Mint, thus increasing their ease of use through trust in the mint. Lastly, one should shop around and search for the best deals in order to find the best price. Premiums on metals are constantly changing, and depending on the type of coin one purchases, the premium could really eat away at the amount of bullion one ends up with. The goal is to acquire the most of the best bullion for the lowest cost, in order to best preserve wealth and attain ease of use during a hyper-inflationary event.
The following is a pertinent excerpt from SunshineProfits.com explaining the possible speculative upside to both metals in addition to their ability to preserve wealth,
Many gold and silver investors believe that the market for both is systematically
manipulated. There are many variations of this theory: some say that precious metals are
under the thumb of central bankers, while others blame big banks and their use of
derivatives (‘naked’ shorts) and high-frequency trading for the declines in the price of gold.
There are also worries about the discrepancy between Paper and physical gold (appx. 250
to 1), the fairness of London trading, declining inventories at Comex and leasing of gold by
central banks. At first glance, this theory makes sense, especially that the price of gold was
fixed for decades by governments or suppressed under the London Pool Gold, while a few
financial institutions have already been fined for influencing or manipulating gold prices.
I would like to note one thing out of this article of particular importance, and that is the paper metal. This refers to certificates or futures contracts that are traded and most often settled in USD. These certificates could be leading to price suppression through the massive increase in liquidity. Basically, if there is more gold, even on paper, then it is worth less. Not only this, but these contracts allow an investor to take physical delivery of the metal. In the event of high inflation, it is almost certain that people will seek a safe haven in gold and silver. If there are 250 claims to every one ounce of silver and even 10% of these take physical delivery a demand driven price increase without direct correlation to inflation is certain. Given that gold and silver win in either ‘normal’ times or hyperinflation, if their price has been suppressed due to the massive amount of paper metal, then it would seem as though they are possibly some of the most undervalued assets in the world currently.
In summation, it appears as though allocating a portion of one’s wealth to these precious metals seems to be a no brainer. Without serious reform and overhaul, the current system will continue to do what it does best, which is to inflate. Given this, the course of this economy and the value of the dollar appear to be on track towards a very tumultuous time. But I would also have anyone that reads this note that I have used the words seem and appear at almost every turn. This is due to the fact that I am in fact doing what some may call speculation. I would argue that I am in fact presenting a theory. That is that no fiat currency has ever survived and that gold and silver do indeed at least preserve value if not gain value. Lastly, I would have you know that I
am not certified to give financial advice by the system we live in, so I could be completely and utterly wrong about all of this. I am in fact an English major, whose gut says otherwise, with no business or capability to understand financial intricacies.
Submitted December 19, 2021 at 08:32PM by Round_Only
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